Unum 2008 Annual Report Download - page 39

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Definition of Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date and, therefore, represents an exit price, not an entry price. The exit price objective applies
regardless of a reporting entity’s intent and/or ability to sell the asset or transfer the liability at the measurement date.
The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing
observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively
quoted prices in active markets generally have more pricing observability and less judgment utilized in measuring fair value. An active
market for a financial instrument is a market in which transactions for an asset or a similar asset occur with sufficient frequency and
volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair
value and should be used to measure fair value whenever available. Conversely, financial instruments rarely traded or not quoted have
less observability and are measured at fair value using valuation techniques that require more judgment. Pricing observability is generally
impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and
not yet established, the characteristics specific to the transaction, and overall market conditions.
Valuation Techniques
Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types:
1. The market approach uses prices and other relevant information from market transactions involving identical or comparable
assets or liabilities. Valuation techniques consistent with the market approach often use market multiples derived from a set of
comparables or matrix pricing. Market multiples might lie in ranges with a different multiple for each comparable. The selection
of where within the range the appropriate multiple falls requires judgment, considering both quantitative and qualitative factors
specific to the measurement. Matrix pricing is a mathematical technique used principally to value certain securities without relying
exclusively on quoted prices for the specific securities but comparing the securities to benchmark or comparable securities.
2. The income approach converts future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount.
Income approach techniques rely on current market expectations of future amounts. Examples of income approach valuation
techniques include present value techniques, option-pricing models that incorporate present value techniques, and the multi-period
excess earnings method.
3. The cost approach is based upon the amount that currently would be required to replace the service capacity of an asset, or the
current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset
is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility.
We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available that can be
obtained without undue cost and effort. In some cases, a single valuation technique will be appropriate (for example, when valuing an
asset or liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques
will be appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh the results, as appropriate,
considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most
representative of fair value in the circumstances.
The selection of the valuation method(s) to apply considers the definition of an exit price and depends on the nature of the asset or
liability being valued. For assets and liabilities accounted for at fair value, we generally use valuation techniques consistent with the market
approach, and to a lesser extent, the income approach. We believe the market approach valuation technique provides more observable
data than the income approach, considering the type of investments we hold. Our fair value measurements could differ significantly based
on the valuation technique and available inputs. When markets are less active, brokers may rely more on models with inputs based on the
information available only to the broker. In weighing a broker quote as an input to fair value, we place less reliance on quotes that do not
reflect the result of market transactions. We also consider the nature of the quote, particularly whether the quote is an indicative price or a
binding offer. If prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to
arrive at fair value. When relevant market data is unavailable, which may be the case during periods of market uncertainty, the income